Cheap pensions inadequate, bosses admit

Company executives say they expect the switch to cheaper, stock market-linked occupational pensions to leave their staff without an adequate retirement income, according to a survey published yesterday.

A third of executives surveyed lacked confidence in the defined-contribution schemes that now make up the bulk of UK workplace pensions.

Most of Britain's big employers have told new workers they can no longer have a pension based on their final salary and length of service. Instead they offer a fixed contribution with investment growth of the fund. Some companies, including support services firm Rentokil Initial, have forced existing employees and new staff into the cheaper pension arrangements.

Pensions experts have said cheaper schemes will leave many staff on low incomes when they retire. Until now employers have been reluctant to admit they might be inadequate.

The pensions consultancy that commissioned the survey, SEI, said: "Talk of a UK pensions crisis has focused on final salary provision, with funding shortfalls and closure of schemes in the headlines. However, the research raises the question of whether defined contribution provision in its current guise is really the panacea."

Employers also said they found it difficult recruiting trustees to sit on pension scheme boards after a raft of rule changes and an increased risk of legal action if trustees made a mistake.

Contract pension schemes, more commonly known as group personal pensions, which are popular among small and medium-sized companies, are also criticised by 40% of employers for presenting staff with a bewildering number of investment choices.

Research by the Cass business school also published yesterday suggested more than 90% of scheme members choose the default option because they do not feel sufficiently knowledgeable to make active investment choices.

"We estimate there are over three million people enrolled with the default option in defined contribution schemes," the Cass report said.

"Most traditional default funds in these schemes do not match members' needs adequately in terms of asset allocation and risk profile."

It continued: "The move to defined contribution is likely to continue at pace and despite a realisation that contract-based schemes do not provide enough support for their employees, many companies are opting for this approach simply to reduce the responsibility on their shoulders."